• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain the meaning of the term 'inflation'.

Extracts from this document...

Introduction

UNIVERSITY OF SALFORD Name: SZE WAH, LEUNG Student Number: @00081259 Course: International Foundation Year Subject: International Foundation Year Macroeconomics Question: 2 Question 2a) Explain the meaning of the term 'inflation'. Along with the development of society more and more problems are brought to our attention, one of which is that 'inflation'. Nevertheless, with the advance of the human civilization, the living standard increases gradually so the price index and Retail Price Index (RPI) rise gradually as well. Deep down, 'inflation' means a persistent increase in all money prices over a period of time which is generally considered to bring costs to society is the form of material, political and psychological costs. Also, the increase must be sustained at some rate before there is inflation and when the price level increases steadily over time. 'Inflation' that is to say, it is decrease in the purchasing power and all money prices to the same extent. In economic, inflation is measured as a percentage change in the PRI over a given period of time, for example, if the RPI increases from 100 to 200 in a year, then inflation is said to have increased by 20% that year. In the UK, the Retail Prices Index is most commonly used measure of inflation. Because RPI is measure the cost of living index, it can reflex the money price level such as through the changes in the prices of goods in the shops by households. ...read more.

Middle

It exist is due to excess demand. It means that the resources are not completely sufficient the different regions and sectors of the economy. Demand inflation means the higher aggregate level of activity, the large proportion of areas and industries which experience excess demand for goods and labors of various sorts. Generally, we can know that increase in aggregate demand will cause higher prices and it bring to the society of cost inflation as well. However, cost-push inflation is reverse of demand-pull inflation. Cost inflation is due to increase the factor input cost such as imported goods and raw materials so that cause to raise the prices or wage rates round the economy. Basically, the costs increase would cause the manufacturer to raise prices, soon afterwards, increases in prices cause workers to demand higher wages as well. So the cumulative effect of all these processes cause of passed on in higher prices to consumers and the cost-push inflation is extremely difficult to stop finally. Question 2c) Suggest how a government might tackle inflation. In economics, there are four ways of dealing with inflation. Fist, government can adopt tough incomes policies to keep inflation under control. Second, government can through institutional and constitutional reform to tackle inflation like as fiscal and monetary policies. Third, government can adopt indexing deal with inflation as well. ...read more.

Conclusion

From figure 2c, which express the price level decrease from P1 to P2 due to the Central Bank increase in interest rates, there is evidence that once increase in interest rates would cause to decrease the aggregate demand as well. To put it more simply, there is also indication that rise in interest rates may exert a downward pressure on prices. Figure 2c: A rise in the rate of interest effect. Third, the government can adopt indexing to tackle inflation. Whereas indexation might automatically adjusts nominal contracts for the effects of inflation, any unanticipated inflation and inflation effect can be tackled. For instance, wage rates, pensions, interest payments on bonds, income taxes and many other things can be indexed in this way. Indeed, the purpose of indexing is to reduce the social cost of inflation. However, everything has a good side and a bad side, and indexing is no exception. Some economists worry about that people would diminish the confidence combating inflation even all prices and terms in contracts will be adjusted according to the price index. Historically, indexation has already been introduced in countries that have had to live with inflation rates of 30 or 40 per cent for years. Finally, there are many ways might tackle inflation for government. Income policies, institutional and constitutional reform with fiscal and monetary policies and indexing are the process to tackle inflation efficiently. Course: International Foundation Year Macroeconomics - Assessment Essay Semester 2 Student Name: Sze Wah, Leung Student ID: @00081259 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    This means the government will fix the price of their currency and not let other factors determine it. This method is exercised in modern day China. Floating exchange rates can be influence by two determinants. If interest rates are risen it makes the countries currency more attractive as its more

  2. Budget 2004-05 and Economic Analysis of Pakistan

    During July-March 2003-04, money supply grew by 12.3 percent as against the target of 11.1 percent and last year's growth of 12 percent in the same period. Unlike previous two years, when the bulk of the monetary expansion resulted from a strong build-up in the net foreign assets of the

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    10% inflation, it will only be if there have been these levels of inflation in the past. This is why some economist argue that this can not be an initiating cause to the inflation. Cost-push inflation is another Keynesian version of inflation where it is shifts in aggregate supply, not aggregate demand, which cause the inflation.

  2. What ended hyperinflation in Germany, Austria and Hungary in the 1920s? Do the facts ...

    The increase in unemployment during the winters of 1924-25 and 1925-26 can be largely attributed to the earlier monetary reform. Further contributing to the increase in unemployment was the dismissal of 10000 bank employees in 1924 due to the sharp contraction of bank operations with the termination of hyperinflation.

  1. With the aid of diagrams, illustrate the causes if inflation and deflation, and by ...

    proceeding at a steady and perfectly foreseen rate, and in which all possible adjustments for the existence of inflation have been made...the main cost of inflation would arise from the fact that interest is not normally paid on currency in circulation', so individuals would make more trips to the bank in order to collect interest on their money.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    The decrease in GDP will cause low productivity due to the shortage of labour force. Therefore, employment rate will decrease and unemployment rate will increase. 5.3 South Africa Dependency Level on Foreign Workers Graph 5: Percentage Distribution of Documented Immigrants to South Africa, 2003 Source: Documented Migration 2003, Report No.

  1. Why does smoking lead to an external cost?

    Another benefit of protectionism is that it stops dumping. Dumping is the sale of goods at less than cost price by foreign producers in the domestic market. As a result large quantities of products are unnecessarily provided (dumped) upon countries. The fact that protectionism such as quotas is imposed stops this from happening.

  2. Unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand

    of payments is moving into deficit The second phrase is a slowdown or recession which occurs when real GDP continues to expand but at a reduced pace and aggregate demand decreases. Consequently, unemployment begins to rise and economic growth start to have an up-ward trend however the effects on the

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work